Property of the week

Why Move Assets To DR?

Why Move Assets To The DR?

The Consequences of Fiscal Irresponsibility
By Roger
C. Altman and Richard N. Haass

The U.S. government is incurring debt at
an unprecedented rate. If U.S. leaders do not act to curb their debt addiction,
then the global capital markets will do so for them, forcing a sharp and
punitive adjustment in fiscal policy. The result will be an age of American
austerity.

ROGER C. ALTMAN is Chair and CEO of Evercore Partners. He was
U.S. Deputy Treasury Secretary in 1993-94. RICHARD N. HAASS is President of the
Council on Foreign Relations. He was Director of Policy Planning at the U.S.
State Department in 2001-3.

The U.S. government is incurring debt at a
historically unprecedented and ultimately unsustainable rate. The Congressional
Budget Office projects that within ten years, federal debt could reach 90
percent of GDP, and even this estimate is probably too optimistic given the low
rates of economic growth that the United States is experiencing and likely to
see for years to come. The latest International Monetary Fund (IMF) staff paper
comes closer to the mark by projecting that federal debt could equal total GDP
as soon as 2015. These levels approximate the relative indebtedness of Greece
and Italy today. Leaving aside the period during and immediately after World War
II, the United States has not been so indebted since recordkeeping began, in
1792.

Right now, with dollar interest rates low and the currency more or
less steady, this fiscal slide is more a matter of conversation than concern.
But this calm will not last. As the world's biggest borrower and the issuer of
the world's reserve currency, the United States will not be allowed to spend ten
years leveraging itself to these unprecedented levels. If U.S. leaders do not
act to curb this debt addiction, then the global capital markets will do so for
them, forcing a sharp and punitive adjustment in fiscal
policy.

The result will be an age of American austerity. No
category of federal spending will be spared, including entitlements and defense.
Taxes on individuals and businesses will be raised. Economic growth,
both in the United States and around the world, will suffer. There will be
profound consequences, not just for Americans' standard of living but also for
U.S. foreign policy and the coming era of international
relations.

THE ROAD TO RUIN

It was only
relatively recently that the United States became so indebted. Just 12 years
ago, its national debt (defined as federal debt held by the public) was in line
with the long-term historical average, around 35 percent of GDP. The U.S.
government's budget was in surplus, meaning that the total amount of debt was
shrinking. Federal Reserve officials even publicly discussed the possibility
that all of the debt might be paid off.

At that time, the United States
had no history of excessive federal debt. This was not surprising since, on
fiscal matters, it has always been a conservative nation. The one exception was
the special and sudden borrowing program to finance U.S. participation in World
War II, which caused debt to briefly exceed 100 percent of GDP in the mid-1940s,
before beginning a steady return to traditional levels.

But over the
first ten years of this century, a fundamental shift in fiscal policy occurred.
When the George W. Bush administration took office, it initiated, and Congress
approved, three steps that turned those budget surpluses into large deficits.
The 2001 and 2003 tax cuts, which will reduce federal revenue by more than $2
trillion over ten years, had the biggest impact. But adding the
prescription-drug benefit to Medicare also carried a huge cost, as did the war
in Afghanistan and, even more so, the war in Iraq.

These steps were also
accompanied by the outbreak of an especially partisan period in American
politics. In Congress, the Democratic center of gravity moved left, and the
Republican one moved right. This caused the historically bipartisan support for
fiscal restraint to vanish. In particular, both the individuals and groups
working to lower taxes and those working to expand entitlements were
strengthened.

These anti-tax and pro-spending forces joined with
President George W. Bush to terminate the strict budget rules of the 1990s. The
result was a swelled deficit. Because there was no longer a requirement that any
spending increase or tax cut be paid for by a corresponding and
deficit-neutralizing budget action, the giant tax cuts were not offset. The
"hard cap" on nondefense domestic discretionary spending (which limited
increases in such spending to the rate of inflation) also
disappeared.

The consequences were predictable. Federal spending grew at
two and a half times the rate it did during the 1990s. Two large rounds of tax
cuts substantially reduced the ratio of federal revenue to GDP. The overall
budget shifted dramatically, from a surplus representing one percent of GDP in
1998 to a deficit equal to 3.2 percent of GDP in 2008. Public debt per capita
rose by 50 percent, from $13,000 to more than $19,000 over this period. The
eight years of the Bush administration saw the largest fiscal erosion in
American history.

Then, on top of this, the financial and economic crisis
struck in 2008, and the United States confronted the possibility of a
1930s-style depression. Washington correctly chose to enact a large stimulus
program and rescue tottering financial institutions. So far, such efforts have
worked, at least to the degree that a depression was averted. A recovery (albeit
one that is halting and weak by historical standards) is under way. But the gap
between spending and revenues has widened much further. Revenues, which had
averaged 20 percent of GDP during the 1990s, fell to nearly 15 percent, while
spending reached 25 percent in 2009. The deficit for fiscal year 2009 hit a
staggering $1.6 trillion, or nearly 12 percent of a GDP of just over $14
trillion. In nominal terms, it was by far the largest in U.S. history. The
deficit for 2010, at $1.3 trillion and nine percent, was nearly as
huge.

The medium-term outlook is poor. The Congressional Budget Office
forecasts $9.5 trillion of cumulative deficits through 2020 -- in other words,
roughly $1 trillion per year. The deficit-to-GDP ratio should decrease briefly
during the middle of this period, as modest economic growth boosts revenues. But
as 2020 approaches, it will rise again, back to nearly six percent, the
consequence of sharply higher entitlement costs and slow GDP growth. President
Barack Obama's own budget shows this same trend -- the first time a U.S.
president has ever projected deficits that go back up.

Federal debt is
the dollar-for-dollar result of deficits, and it has essentially tripled over
this past decade, from $3.5 trillion in 2000 (35 percent of GDP) to $9 trillion
in 2010 (62 percent of GDP). The Congressional Budget Office now sees it
reaching 90 percent by 2020.

THE BIGGEST BORROWERIt is important to understand the
impact of all this debt. As it grows, interest rates inevitably rise. As they
do, the U.S. government's annual interest expense -- the cost of borrowing money
-- will rise from one percent of GDP to four percent or more. At that point,
interest expense would rival defense expenditures. And it would exceed all
domestic discretionary spending, a category that includes spending on
infrastructure, education, energy, and agriculture -- in effect, anything other
than entitlements and national security. The U.S. Treasury would need to borrow
a staggering $5 trillion every single year, both to finance deficits and to
refinance maturing debt.

Yet the real outlook for deficits and debt is
much worse than these forecasts. For one thing, the debt that the United States

Brouse this site and the 552 listings for great investment opportuinites. Email me with any quesitons you may have.